What is Weighted Average Life (WAL)?
Weighted Average Life (WAL) measures the average number of years it takes to receive principal payments from a loan or pool of loans. Each principal payment (scheduled amortization, prepayments, and defaults settled at par for government loans) is weighted by its dollar amount and timing. WAL is critical for whole loan pricing because it determines which point on the yield curve to use as the benchmark; a loan with a 3-year WAL should be compared to 3-year Treasuries, not 30-year Treasuries, even if the original term is 30 years.
Formula
WAL = Sum of [t(i) x P(i)] / Total Principal Where t(i) is the time in years to each principal payment P(i)
How LoanBook Uses Weighted Average Life
LoanBook calculates WAL as part of the core analytics engine, incorporating projected prepayments (CPR) and defaults (CDR). WAL drives the benchmark Treasury rate selection for spread calculations and is displayed prominently in portfolio analytics, term sheets, and the SBA trading portal.
Frequently Asked Questions
How does WAL differ from remaining term?
Remaining term is the contractual time until final maturity. WAL accounts for the expected timing of actual principal return, including prepayments and defaults. A 30-year mortgage with 15% CPR might have a WAL of only 5-7 years.
Why does WAL matter for pricing?
WAL determines the appropriate benchmark rate. Pricing a 30-year mortgage pool off the 30-year Treasury would drastically understate the spread, because prepayments mean you get your money back much sooner.
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